Redirecting

Tuesday, December 30, 2008

Even if you lived in a cave, you probably heard that GMAC will be receiving some (and by "some" I mean "six billion dollars") money from the government. Of course, this is on top of the $13+ billion that GM was promised already, but I want to talk about the math behind GMAC.

GMAC has to pay the government an 8% dividend on this injection of capital (in the form of preferred equity shares) it received. GMAC is turning around and lending this money to would be car buyers at 0% . Now, you may have heard the old maxim regarding the rule of thumb for bankers: 3-6-3: they borrow money at 3% (ie, take in deposits, and pay 3% interest), they lend money at 6% (ie, a mortgage) and they're on the golf course by 3 o'clock. I'm not a math major - no wait - in fact, I AM a math major, and I can tell you that GMAC's 8-0-6 plan won't work... what it will translate to is: borrow money at 8%, lend it out at 0%, and be bankrupt in 6 months. Anyone want to set an over/under on the total amount of money we (the taxpayers) will dump on GM and GMAC before all is said and done? I'd say it's a toss-up between the GM/GMAC total, and the Miami Dolphins vs Baltimore Ravens total for the AFC wildcard playoff game this weekend, which is 37 1/2 points. In GMAC's case, that's 37.5 Billion.

GMAC's most recent move should put to rest any question as to if this is an "investment" or not: I know of no business that makes money borrowing at 8% and lending at zero percent... I guess they'll make up for it in VOLUME! Perhaps the model would stand a chance if they made money on the cars they sold, which they don't.

"GMAC will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers."

The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.”

Wow. Go back and read that again. The standards GMAC were using before this latest bailout meant they were ONLY (note: SARCASM!) lending to 58% of all U.S. consumers! Holy fuck! That doesn't exactly sound like they were only lending to the Rockefellers and Buffets of the world! You're telling me that 58% of U.S. consumers was too narrow a market? As I've said before, the problem isn't a lack of available money to lend, the problem is a lack of qualified borrowers, given that lenders have re-adopted NORMAL, REASONABLE lending standards. GMAC proved this today, by immediately lowering their lending standards so that they could lend more money.

update: I just read Karl Denninger's post from today, where he basically has the exact same line of thought I enunciated above. Denninger also points out that the median FICO credit score in the U.S. is 723. That means that 1/2 of all Americans have a credit score above 723. Thus, 621 cannot possibly considered "prime" as GMAC claims.

Thursday, December 25, 2008

Thursday, December 18, 2008

CSFB designed an interesting solution to the problem of executive compensation in tough times on Wall Street: they took their "troubled assets" and put them into a fund. Senior employees (directors and managing directors) will be given stakes in the fund as part of their compensation! Thus, if the assets are really worth what people say they are, the execs will make out nicely If they're full of it, they'll eat their worthless paper. I especially like the comment on Barry's blog in the link above suggesting that Congress be compensated the same way: with the gains from the "investments" of the TARP loans!

Paul Kedrosky has a link to some must read stuff on Bernie Madoff. If you read the warning letter that Harry Markopolos sent to the SEC years ago it probably won't make you think any higher of the SEC.

Schapiro has troubled these pixels but once, when we reported that in 2003, during a period when she was opining vociferously on hedge fund-related broker-dealer disclosures and the adequacy thereof, her valiant sleuths swept through the offices of Bayou Securities LLC in Scamford, Conn.

There, they found $8500 worth of allowing “two individuals to execute transactions...without first obtaining registration as equity traders…” and failing “to update written supervisory procedures reasonably designed to achieve compliance with said regulations…” The missing however many hundreds of millions it was by then quite escaped their attention as, boxes all checked and wrist-taps to come, the sleuths boarded the train back to Boston.

For the uninitiated, Bayou was the original hedge fund ponzi scheme - back before Madoff was discovered. Schapiro apparently had her chance to take a look at their books, but came back with doody.

I liked the point of this Bloomberg article, which points out that the Fed is making hundreds of billions of dollars of loans based on the AAA ratings of securities which were rated by the same people who've already proven their ratings cannot be relied on.

Finally, via CNNsi HotClicks, I had no idea there was such a thing as trick bowling:

Tuesday, December 16, 2008

My dog Oscar did something funny this weekend. We stopped at the store and bought him a beef chewy - this tendon thing that he can go to town on. He's had treats similar to it, but never this exact treat before. So, my wife and I are in the backyard cleaning up our patio, and there is a hole in the flower bed that Oscar had dug many weeks before - if he wants to rumble with us, he digs a hole because he thinks it'll antagonize us into chasing him around the yard.

Anyway, he's trying to get us to chase him, but we're only half-heartedly playing with him, cause we're trying to clean up. Oscar ditches us, goes inside and gets his new chew treat, and brings it outside. He places it in the hole, and then I see him moving his face back and forth across the dirt.

I got my wife's attention, and mouthed "what's he doing?" He was burying the bone, using his nose as a shovel! Oscar is a talented digger with his paws, but he elected to replace the dirt with his nose. It was incredible, because 1) I'm certain he hasn't seen another dog do this, and 2) he's not a hound/hunting/digging dog - he's a Brussels Griffon, which is a toy breed, and thus I wouldn't expect him to have any innate "bone burying" tendencies.

For some reason, we were very proud of the guy for showing the desire and ingenuity to bury his bone, and he was obviously insanely cute when he was done, face covered with mud. We were trying to figure out if a) he really liked the treat and wanted to save it or b) hated it and wanted to get rid of it so we would get him something else! I'm leaning toward a).

Monday, December 15, 2008

I want to re-address the Bernie Madoff story for a second here, because something is bothering me. Now, on the one hand, I want to chide the investors in the fund for being greedy and blind: refusing to ask questions about how the fund was making money as long as the money was coming in. HOWEVER, Dealbook, today, published some trading statements that Madoff customers received. Looking at these statements, I can't think of any way that a customer could look at them and have any reason to conclude that the business was anything other than legit.

Said differently, I had a 401k account at Scudder in which I owned a variety of mutual funds. Every quarter, they sent me an accounting statement which shows the change in value of the funds. Obviously, I assumed that my money was actually being invested in these funds. I also assumed that the funds were honestly reporting their positions and trading. I have no reason to assume fraud anywhere in the chain - but Scudder could be completely fabricating my statements, just like Madoff did... I think this is highly unlikely, and thus I'm back to sympathizing with Madoff's investors instead of blaming them for being blind and greedy.

So that takes care of the individual investors, but there was also a massive class of institutional investors (managing money for individuals) in Madoff's fund. Do they have a higher fiduciary responsibility than individuals, and the obligation to know exactly what they are investing their clients' money in? Yeah - I think they do, and I think they are to blame big time. Does the argument "hey, how could Nomura know there was fraud - they were receiving the same phony statements" hold water? I don't know... I want to say "no," but I'm not sure I'm being consistent here...

After taking down the third qualifying match last week to force a playoff for the final seat in the Pokerlistings Run Good Challenge 2 Finals, I ran good again this week to bring home the bacon and capture the title, the money, the glory, the trophy, the championship bracelet, and the commemorative watch (note: only the money actually happened...)

In the finals I won the first hand against the PokerShrink, who thinks I'm a maniac, when I three bet him from the button with AhKh and extracted some more value vs his AJ when an ace flopped. I played pretty aggressively, picked up a few hands, avoided some trouble spots, and stuck a fork in Benjo when he trapped me in a pot but left me with plenty of outs. I'd been raising frequently, and with 25-50 blinds I made it 150 to go from middle position with 33, and Michele Lewis called. Benjo on the button made it 550 to go, and I elected to call and see what happened. Michele called as well, and we saw a flop of A-9-4 with two clubs. I checked, as did Michele, and Benjo offered us a free card. The turn was the 5c, giving me a gutshot wheel draw and a three high flush draw, which was obviously the nuts. I bet out half the pot, Michele thought before folding, and Benjo shoved, which was less than a min-raise. I called getting over 5-1, and Benjo's A-J was punked on the river when an offsuit deuce fell.

When will these kids learn to stop taking AJ up against the Kid! DYKWTFIA?!?!?! Anyway, I owed Benjo that for the beat he put on me in the second tourney of this series, when his QQspiked a river Q against my AA after I'd trapped him. I pointed out that my suckout was about 5% as sick as his suckout, but Spaceman claimed it's more like 8% as sick.

The field was eventually whittled down to myself, Luckbox, Amy Calistri, Pokerlistings host Matt Showell, and Defending Run Good Challenge Champion, Change 100. Amy wielded her short stack with Juanda-esque efficiency: fearlessly blinding herself down almost to the felt before doubling up - a strategy she repeated at least three times before we were finally able to send her to the rail. "Lucky" Matt Showell was on the ropes when I got him to call off his chips with A-2 vs my A-9 on an ace high board, but he was saved when the board paired on the river to earn him a chop. Soon Matt's luck ran out, leaving Luckbox, Change100 and me to fight it out for the glory.

Change100 was unable to pull off the greatest poker back to back since Chan won his second WSOP bracelet, and instead settled for second place against me, after eliminating Luckbox in third place.

Saturday, December 13, 2008

Dilbert once again nails it in three simple frames: if you're missing the reference, the cartoon is mocking the mortgage backed securities market, where slices of subprime loans were repackaged into new securities which somehow attained a AAA top tier rating.

The SEC boggles my mind. I wrote months ago about how they had to close their broker-dealer oversight division because, well, they failed in their oversight and all the broker-dealers (BSC, LEH, MER, MS, GS) blew themselves up and ceased to exist! In the Madoff case, someone gave it to them on a silver platter almost ten years ago yet they STILL failed to detect any foul play. Incredible. The simple maxim: "if it looks too good to be true, it probably is," is something well within the SEC's powers to deconstruct, even mathematically.

When someone achieves returns that seem remarkable and unexplainable, some people ask questions (as highlighted above) and some people skip the questions and look for ways to make more money. In the case of Madoff, how do you take exceptional returns and make them better? Simple: Leverage! Nomura sold a 3xLevered version of Madoff's fund to investors. This is the best part of the whole story. Figure out how he's making the money? Nah... just LEVER IT UP BABY! As Clusterstock points out, incredibly, the leveraged fund in this case ended up doing no worse than the regular fund: they are both worth zero now.

I've written previously about our treatment of this debt crisis being a Ponzi scheme. Sure, maybe the intent of the government isn't to steal and defraud, but in any case, the music will stop at some point - Bernanke will stop throwing money at the problems, and our day of reality (I was going to say "reckoning" but it's really just reality: home prices must fall, we must lower our debt load, we can't spend our way out of this problem) will come.

Maybe then Madoff will slip to number 2 on the list of greatest Ponzi schemes in history.

Friday, December 12, 2008

Last night the Senate failed to pass the bill to bailout the U.S. Automakers. This morning, the Treasury piped in and said: ""Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,'' (Treasury spokeswoman Brookly McLaughlin).

My question is this: why did we bother to waste Congress's time debating this issue if the Treasury was going to step in and give them the money anyway? Just to have the illusion that the American people have any say in anything anymore?

"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," White House press secretary Dana Perino said. Really Dana? Why didn't you just slam the table with your Thor's Hammer Gavel last week then - and America could have avoided wasting billions of dollars covering the up to the minute developments in the bailout debates, which, it turns out, may not matter anyway!

This reminds me of a kid who quickly learns that if he asks dad for something, and the answer is no, he should just go ask mom. If that fails, there's always grandma and grandpa. SOMEONE will say yes eventually.

You may notice that my argument is independent of the fact that I believe we should NOT bailout the automakers: the point is, we have a process, we followed the process, and it seems the whole thing was a sham - our elected officials have spoken, but someone somewhere doesn't like what they said. What a joke. I mean, we could at least do what we did with the TARP hearings: after the auto bailout was rejected, let's wait until Congress panics when the stock market tanks, and makes the mistake of confusing the stock market with the good of the American people, changes their mind, and passes new legislation. That process sucks, but it's better than Congress's will being ignored or overruled.

And in other news, just in case you missed the Bernie Madoff story: it turns out his entire asset management business was a ponzi scheme (and possibly the biggest ponzi scheme in history!). The great thing, though, is that as long as he turned out positive returns, no one cared! (Sounds like the same symptoms of our massive credit bubble doesn't it? Take on massive risk, but no one cares as long as the returns are positive!) As Clusterstock points out, Barron's actually questioned his returns back in 2001, as he seemed to have made the same mistake as the guys who cheated at online poker: he never lost money! Another brick in the wall.

Sunday, December 07, 2008

I finally ran good, and took down the third episode in the Pokerlistings Run Good Challenge 2 series. After getting all in early vs Luckbox with KsJs on a QsQc9s board against his pocket 4's, I had too many outs to count - spiked a king on the turn to double up, and was never all in again for the duration of the tourney. I dispatched Chops with my QTo vs his TT after I raised preflop and was getting 2-1 to call his shove. This prompted a series of incredulous text messages from Chops after I sucked out on him: "QT?!?!?!" " ??????" "?!?!?"

Shortly thereafter, Michele Lewis smooth called my preflop raise (she had QQ) and then called when I put her all in on the 8 high flop. My 44 was way ahead after a 4 fell on the rio, and I turned my attention to the PokerShrink, who I again dispatched with 44 when I flopped a set on an ace high board after raising preflop, and there was no getting away from it with his AJ. Interestingly, Shrink has me classified on his blog as "LAG maniac."

Pokerlisting's own Dan "the boy" Skolovy put on a very impressive display of call and response B.I.G. lyrics with me, which was necessary to get Chops to stop talking about Candlebox and other lost in the 80's bands. Since rap music is illegal in Canada, Skolovy had to study his rhyme craft deep in an igloo by candellight while sitting on a beaver pelt, but learned well.

I avoided getting stuck in a team play sandwich between Dr. Pauly and Change100, who were playing while running from the Federales in Mexico, and Pauly was eliminated by Pokerlistings host Matt Showell. We ground down Change100 to set up the heads up bloodbath between me and Matt. I needed a first place finish just to set up a 3 way tiebreaker for the last spot in the grand finale between myself, the Spaceman, and Dr. Pauly, and I achieved just that after a back and forth battle with Showell, which ended with me raising on the button with 77, and 4-betting a pot-sized re-raise after he 3-bet me. Showell tanked and called with A8, and my hand held up, shipping me the generous freerollprizepool and setting up a tiebreaker for the final spot.

Thanks again to the folks at Pokerlistings for giving me a chance to play with the A-list poker blogging elite in this freeroll series.

"I'm really happy to be back in Calgary; I love Canada," the Ontario native said. "I just want to comment on how it's become like a common thing in the NHL for guys to fall in love with my sloppy seconds. I don't know what that's about, but enjoy the game tonight."

I'm no Sean Avery fan, but seriously - that warrants a suspension in the NHL these days? Talk about signs of the apocalypse. It's not like he yelled something rude at Elisha in front of the camera, like:

Tuesday, December 02, 2008

Clusterstock got me all fired up this morning by pointing out an op-ed in today's WSJfrom former AIG CEO Hank Greenberg. Now, more than three weeks ago I addressed the atrocity that was out RE-negotiated bailout terms for AIG - since the terms of the initial bailout were just too reasonable for the US Taxpayers. Hank Greenberg, however, says it's still not fair! Really? Really Hank? AIG took risks they couldn't possibly mitigate, printing profits by doing so for many years, and then when the bill comes due you think it's not fair? Hank writes:

"The role of government should not be to force a company out of business, but rather to help it stay in business so that it can continue to be a taxpayer and an employer."

Huh? Hey Hank - if the government hadn't stepped in, your company WAS going out of business! Also, due to gross ignorance of the risks, they were going to take a lot of other people down with them! As for the bullshit about it being in the government's best interest if AIG remains a taxpayer, a quote from Rounders comes to mind:

We're supposed to want AIG to remain a tax-paying entity so they can pay us back with our own money? No thanks Hank.

I read a hedge fund quarterly letter at the end of September from Oaktree's Howard Marks, where he explained that although he's generally bearish, he doesn't bet on the end of the world because if he's right, he won't be able to collect on his bet. AIG's business model was pretty much to take the other side of people who wanted to bet against the end of the world (or lesser transgressions) - AIG provided insurance against such events. Of course, when these "unlikely" events happened, AIG couldn't pay off the bets anyway.

Along these lines, I'm somewhat surprised that there isn't more discussion about the US Government credit default swaps which have widened, last I heard, to around 55bps (from under 10 bps). Why not sell this CDS? If the US Government defaults, we'll all be so fucked anyway that no one will be able to settle these CDS trades... There you go AIG - I just gave you a new line item for your 2009 business plan.

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